CEDIA Market Stats Reveal Opportunities for Members

Like past years at Expo, CEDIA presented a summary of their findings from the recently completed Size and Scope survey at Expo 2018. This year, however, the presentation was made by Grant Farnsworth of The Farnsworth Group, an Indianapolis-based market statistics consultant who did an excellent job in conveying a lot of detailed and important data to show attendees.

See the latest CEDIA market data…

It was refreshing to have this presentation made by someone more steeped in data and statistics, and Farnsworth did a good job of not only showing the numbers, but explaining their meaning. He seemed to have a good grasp of the data…and of our industry…even though he told me afterwards in an email exchange that this is the first year his company was brought in to “execute the research and analysis.”

CEDIA’s study is called the 2018 U.S. Market Size and Scope of the Residential Technology Systems Industry. Farnsworth began his summary overview by explaining some of the basic economic factors that are drivers affecting our industry – including things like household growth (low), interest rates (increasing), housing affordability (trending down), etc. He then described what factors represent a threat to our industry, such as housing inventory (low), homeownership rates (flat), material prices (high). I listened to this presentation closely, as many of the factors that Farnsworth pointed out I had recently noted in an article here on Strata-gee (see: Are You Prepared for the Coming Recession?)

Housing Not at Historically Healthy Levels

Farnsworth pointed out that some of these trends have combined to impact household formations.

“Historically, a healthy growth rate for our nation is about 1.2 million households per year,” Farnsworth told attendees of the presentation. “Right now, we’re around 800,0000. So our country is not generating historically a healthy enough level to drive a lot of the demand that we would typically see on the new housing side.”

Key economic drivers affecting the U.S. economy and the custom integration industry

The researcher also noted how the various trends he referred to can interact with each other. In the case of home affordability, “…this takes into account interest rates…takes into account median home value, median income, etc…what the average person needs to afford the average home,” Farnsworth explained. “Unfortunately, it’s now at the lowest point it has been in ten years. But fortunately it’s still above norms.”

If Not a ‘Full-On’ Recession, At Least a Leveling Off is Coming

In talking about housing starts, and specifically single-family home construction starts, Farnsworth noted concerning trends including construction material cost increases, construction labor shortages driving up labor costs and other factors inflating home prices and flattening out home sales rates.

Residential housing construction starts – multi-family (red) and single-family (blue). Single-family starts are considered an important economic indicator for the custom integration industry

“A lot of economists a lot smarter than I am are predicting around 2020-2021, it may not be a full-on recession, but at least a leveling off – a return to normalcy as some of these people withdraw from the market… ,” Farnsworth suggested. “So for the next 18 months [things remain] positive, still good, solid, modest growth – more so on the single-family side than the multi-family. But, two-three years out from now, it may just become 1 or 2 percent growth instead of the 5 or 6% we’ve seen over the last few years. I’m not doing this to bring doom and gloom…it’s important to understand the context in which we’re working because that helps us understand why we may see some shifts in numbers for the market.”

Looking at the remodeling market – which many of us refer to as the retrofit market – the researcher noted that this business is much more stable, if not high growth – but good predictable growth over time. Farnsworth suggested that there may be more “solid opportunity” on the “R&R” side (residential remodeling)…than in new construction.

Graph showing residential remodeling activity in projects and in value

Integrator Demographics

Farnsworth then went through some demographic information on the integration companies who participated in this survey. According to Farnsworth, 584 professionals participated in the study. Of this total, 308 fully completed the entire survey…another 276 answered some, but not all, of the questions. Participants had to be:

at least 18 years old

an influencer in products purchased or specified on an installation project

must have installed at least one of the categories CEDIA is tracking as part of this survey

must derive at least 20% of their revenues from residential projects

AND must have completed a minimum of 3 projects in 2017

Of this group, 100% (by definition) were doing residential installations. What was interesting was to see the trends in those performing commercial and industrial installations. In 2016, 75% reported doing commercial installations. Just two years later, 94% reported engaging in commercial installations.

Missing Information

BTW, the slide in Farnsworth’s presentation that showed this breakdown was one of the first slides where we noted that there was a “missing” year in the report. Later, I would see more slides with a year of data missing in his presentation. I asked Farnsworth why occasionally years would be missing from various results. In this particular instance, there was no data for 2017. Farnsworth said that on certain items from certain years, the data was “unreliable.” This probably means that the response rate on that question was too low to be taken as a reliable indicator of actual performance.

In this breakdown, integrators report a significant upswing in the number of commercial jobs they are doing. Note how this chart skips the results for 2017. See the text for why CEDIA did this

I give him great credit for admitting this because, in past presentations, I have questioned strange or wildly swinging results, suspecting that the numbers were inaccurate. Previous presenters either didn’t understand that this data was unreliable and shouldn’t be presented…or they knew but didn’t care. But Farnsworth answer suggested to me that he was confident of the information he waspresenting today.

Interestingly, the survey respondents reported that their number of full-time employees is declining. Farnsworth suggested that this could be due to older employees “aging out” of the workforce. But we suspect that there may be other factors at play in this result. First of all, it could be that more and more integrators are using more part-time employees to save on benefits expenses. It could also be that integrators, as their teams become more and more capable, are able to do more installations with fewer technicians – driving up efficiency.

Sizing the Market

Farnsworth showed those at the presentation how they calculated the size of the market. Basically, they used two different means to calculate the potential market size…and then averaged their results together to come up with an official estimate of a $19.74 billion custom integration market.

The first system they used to estimate market size was to take the average AV company revenue TIMES the average percentage of their installations that are residential TIMES the total number of companies. This mathematically calculated out to a total market of $13.95 billion. Then they took the non-AV company’s average project value TIMES the number of projects per year TIMES the number of companies. This calculation yielded a total of $4.37 billion. Adding these two numbers together came to a total market size of $18.68 billion.

The second method involved looking at product category sales for home network, audio systems, control systems, security systems, media rooms, lighting control systems, home theaters, and outdoor audio systems. For each of these product categories, they took the median number of projects TIMES the median project value TIMES the number of companies doing that category in a project and added them all together. This calculation yielded a result of $20.799 billion in market value.

CEDIA says custom integration is a $19.74 billion market. See the text to get all of the details on how they arrived at this number

A Flattening Trend

These two different results were then averaged together to get CEDIA’s market size estimate of $19.74 billion for 2017. Accurate? Probably not. Close? Hopefully so…

A slowing growth trend in the overall custom integration market

However, CEDIA’s data shows that the market increased dramatically in size between 2012 and 2014 from $12.3 billion to $19.1 billion in total. But since then, growth actually declined in 2015 and only now recovered in 2017. So the rate of growth of the overall market is something we need to keep an eye on.

Opting for Opportunities

CEDIA’s data did shine the light on some potential opportunities for growth. Farnsworth drew attendees attention to data on remodeling activity which shows a growing number of people choosing to move to one or more “smart” systems as part of remodeling projects to upgrade their homes.

He specifically highlighted four main remodeling categories that can be updated with either non-smart or smart technologies. These categories were: Lighting, Climate Control, Security/Safety, and Entertainment. So, for example, about 90% of remodeling projects involve updated lighting. Of this total, about 78% of these updates utilize traditional lighting…and about 12% move to smart lighting systems.

Opportunities in residential remodeling

Security & Safety Surges in Remodeling

The researcher noted that in the case of the security/safety category, 51% of remodeling projects include updated security and safety systems. Of this total, a significant 25% opt for smart security and safety solutions that will most likely require the services of a custom integration specialist.

In new home construction, Farnsworth noted that an integrator’s best strategy is to partner with those home builders who are embracing smart home technologies. According to data from John Burns Real Estate Consulting, when a builder offers consumers smart home upgrades, 80% of the time the consumer will purchase it. So if an integrator is partnered with that builder, in 8 our of 10 construction projects, he will get that smart technology installation.

Smart Home in New Construction is a Huge Opportunity

There are major regional differences in this result, however, with Florida leading the pace with 81% of all new construction including some form of smart home systems. Florida is closely followed by California. But the data runs all the way down to the Northeast where only 23% of home are constructed with smart home technologies included.

Graph showing the regional breakdown of new construction that includes smart home systems. Also note in the lower right the major categories in which consumers say they want to invest

And what categories do consumers say they are willing to pay extra for when buying a new home? You guessed it – security & safety related items, including: exterior security camera (60%), keyless entry (63%), wireless security system (75%), and builders offering smart security/locks (60%).

How’s Business? Ridiculously Good, But Not Without Challenges

Turning his attention to business confidence – well, as we’ve noted before, integrators are a confident bunch. When asked on a simple ten point scale how confident the integrator was in his ability to get new business in the next twelve months, more than 80% said they were very confident (an 8,9, or 10 rating.) And that was for all sizes of businesses.

When asked how much they expect their business to increase, the largest group of respondents (34%) said they expected business to increase 6-10%. The second largest group (33%) said they expect an increase of 11-20%. That’s pretty darn confident!

Integrators remain an optimistic bunch with 80% expecting growth this year. How much growth? Most of the survey respondents say their businesses will grow between 6-20% this year.

But as good as things are, there are challenges that remain, causing some concern and sleepless nights for integrators. First and foremost, integrators say their top challenge is Staffing/Finding/Keeping (Qualified) Help/Employees (29%). This is followed by concerns over DIY companies/products (15%) with items that consumers can easily install themselves. The third top concern is internet pricing/sales which integrators say is difficult to compete with (9%).

Top challenges faced by integrators

This is Gross

As positive as all this news was, we were surprised to see that integrators report that their average gross revenues have been in a long term down trend. According to CEDIA’s data, integrators report that their average gross revenues were $2,278,213 in 2014. This average dropped to $1,910,00 in 2017. Survey respondents are forecasting that gross revenues will bounce back to nearly 2014’s level in 2018, estimated to come in at $2, 213,000.

This chart shows the average gross revenues of the survey takers’ companies. Note there is no reading for 2016. The reason for this is explained in the article text

“I will say, in looking at the data from every year this thing has been conducted, it’s an optimistic bunch,” Farnsworth said pausing with a touch of irony. “Take this with a grain of salt. Their predictions, typically don’t match the reality of what actually happens.”

Farnsworth put a positive spin on this, noting the the number of full time employees has declined (which means fixed costs have declined) yielding, presumably, greater profits for the integrator. Perhaps…

When breaking down revenues to see the distribution of revenues among the survey participants, we learn that the largest group of survey respondents (19%) report revenues of between $500,000 – $1,000,000. The next largest group (15%), fall into the range of $250,000 – $500,000. And the third largest group (14%) report average gross revenues under $250,000.

Here you can see the distribution of the size of the gross revenues for the survey takers’ companies. The largest group (19%, hidden by Farnsworth’s hand) is in the $500k – $1 million range.

Business Breakdown

Respondents told CEDIA that 75% of their revenue comes from residential projects. Of these projects, the majority (49%) is retrofit, another (44%) is single-family new construction, and 7% is multi-family/condo projects.

As far as the type of installations, there were no real surprises there on a slide comparing installations over two periods of time: 2015/2016 versus 2017/2018. Except for one surprise – in 2015/2016, 50% of respondents reported installing security systems. Now in 2017/2018, that number jumps to 82%. We suspect that is largely due to the growing proliferation of IP-connected security cameras and wireless security systems.

This graph shows a comparison between the types of systems installed in the 2015/2016 period and the 2017/2018 period. Big growth is reported in Networking (+14%) and Security (+32%)

As far as number of projects, the survey respondents reported an average of 67 projects a year and estimate that the number of projects will rise to 77 in 2018. However, a number we might find a little more realistic is the mediannumber of projects, which is 35. This is projected to rise to 40 in 2018. Averages, as I’ve said in the past, can be misleading with one or two large players pulling up the average for everyone. The median figure, the number equidistant between the largest and smallest number is really a more accurate gauge.

From What Kind of Professional are Integrators Receiving Bid Requests From?

CEDIA asked a new question this year, the results of which we found fascinating. Survey takers were asked what kind of professional are they most often getting bid requests from? Number one on this list, perhaps not surprisingly, was Builders, according to 29% of the respondents. The next most common type of pro to receive a bid request from was Residential Remodelers (17%). Number three on the list of professional bid requests was Designers (10%)…followed by Residential Architects (8%).

From what type of professional do most integrators receive bid requests from? By a wide margin, from Builders

Following this section, Farnsworth went through several product category specific slides showing both average and median results in 2017, with forecasts for 2018. There were no huge surprises here and we will include the slides with the results in our slide show – please click through to see all of the data.

Security Still Surprises

However, there was one area we found surprising – security. Yes, the emergence of strong growth in sales and installations of security systems was a theme throughout Farnsworth’s presentation. But his last slide graphically showed a dramatic uptick in this trend. In 2015, respondents reported they performed an average of 38 installations of security systems for an average project value of $1,530. But in 2017, they said they did only 23 security installations worth $5,099 on average. That is, statistically speaking, a big swing to substantially fewer security installations for substantially more money.

Graph showing trends in Security System installations. Note the remarkable drop in the number of installations and the extremely large jump in average revenues in 2017

Overall, it was great to receive some market data on custom integration that dealers can use to benchmark their businesses. Hopefully, CEDIA will continue to conduct these surveys…and hopefully more CEDIA members will participate, as greater participation means a larger sample and more accurate results.

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About Ted

A sales and marketing specialist - primarily in the technology industry - I've experienced a sort of "circle of life" in business. I've been a mass merchant retailer, a specialty retailer, a specialty manufacturer, a large volume manufacturer, a distributor, and even represented sales representatives.
Now the owner of a marketing company that works with a variety of businesses on improving their strategic marketing and business development - I analyze issues from all angles to develop holistic solutions.

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